The vast majority of homes purchased are purchased on a the basis of loan instrument which includes a promissory note that specifies a principal amount borrowed from a lender and an interest rate, and is secured by a mortgage or deed of trust on the property. The promissory note establishes the borrower's obligation to make periodic payments to the lender and the mortgage or deed of trust establishes a the lender's right to foreclose on the property in the event the borrower fails to make the scheduled period payments.
Under most circumstances the borrower completes the loan obligation by making a lump sum payment before the end of the period to satisfy the loan. However not all borrowers can consistently make loan payments. Often times an acute event or circumstance may cause the borrower to stop making payments. For example, unexpected medical bills, a layoff from a job, a sudden downturn in business, or any other number of other unforeseen financial hardships may cause the borrower to suddenly stop making payments and default on the loan.
As a result of the borrower's default the lender may foreclose on the property. Foreclosure is a legal process by which the lender will ultimately obtain title in property and resell the property. From the borrower's perspective foreclosure is traumatic both from a financial as well as emotional standpoint. From a financial standpoint, the borrower not only loses the equity which has been established in the property but even after the property has been foreclosed continues to suffer in the sense that the borrower's credit has been irrevocably damaged. This damage to the borrower's credit may ultimately prevent the borrower from purchasing a subsequent home. From an emotional standpoint the borrower suffers from the loss of a home. This loss may further exacerbate the difficulties (e.g. sickness, loss of job) that caused the financial difficulties to begin with.
From the lender's perspective foreclosure is also undesirable. The foreclosure process is costly and thus further increases the lender's interest in an already distressed property. In addition unless the ultimate sale price of the home after foreclosure is substantially higher than the original value of the home the lender's return may be compromised.
Prior to foreclosure or subsequent thereto the borrower may file for bankruptcy. Ultimately however the result is the same, i.e. the bank will foreclose on the property once the payment schedule has not been met. Accordingly foreclosure and its resultant hardships discussed above are not avoided by the borrower filing for bankruptcy. Moreover, by filing for bankruptcy, the borrower's credit will likely be damaged to point where obtaining any future loan will be extremely difficult thereby preventing the homeowner from purchasing a future home.
From the lender's perspective bankruptcy is also not a desirable alternative since the lender may be forced to “get in line” with other creditors and may only be able to obtain only a fraction of the loan amount. Further, bankruptcy is a rather complicated legal proceeding and thus has associated legal fees and costs.
In view of the above it is desirable to seek techniques which would enable the borrower to satisfy his loan obligations, as well as his other financial obligations, and at the same time maintain residence in his home while meeting such obligations. Similarly it is desirable to seek techniques which would ensure payment of the loan to the creditor in full without the need to rely upon either foreclosure and/or bankruptcy proceedings.